2010 Federal Budget Summary

Written on the 17th of May 2010

Personal income tax cuts

The Treasurer reiterated relatively modest tax cuts announced last year to people earning income in the $80,000 - $180,000 bracket, from 1st July 2010, as follows:

From 1 July 2010 the Low Income Tax Offset (LITO) will increase from $1,350 to $1,500, which will effectively enable taxpayers with income up to $16,000 to pay no tax.

Optional standard deduction for work related expenses and cost of managing tax affairs

Whilst income tax returns will remain with us, from 1 July 2012 the Government will provide individual taxpayers with an optional “standard deduction” of $500 in lieu of claiming either work-related expenses and/or tax agent fees. The standard deduction will be increased to $1,000 from 1 July 2013.

Taxpayers with expenses above the standard deduction will be able to continue to claim those expenses when lodging their tax return under the existing substantiation and deductibility rules.

Presently there is a $300 per year deduction available to individuals which may be claimed without the need to provide receipts. The ATO however police this claim closely, with the view to ensuring that only those deemed ‘eligible’ in fact claim the deduction each year. It will be interesting from a practical standpoint whether this ‘eligible’ attitude remains within the ATO, or whether the standard deduction is truly available to all.

Medical Expenses

Taxpayers will now need to spend $2,000 per year before being eligible to claim the 20% net medical expenses tax offset, with effect from 1 July 2010.

Senior Australian Tax Offset (SATO)

The amount of income a senior Australian eligible for SATO can earn before they pay income tax or the Medicare Levy will increase from $29,867 to $30,685 for singles, and from $25,680 to $26,680 for each member of a couple.

Superannuation Contributions Limit

There has been considerable angst at the changes made in 2009 to reduce the annual concessional contributions to $25,000. While there is a higher interim level until 30th June 2012 of $50,000 for those who have attained age 50, many have argued that these limits are too low – particularly for those who need to “catch up” contributions later in their career. Members over age 50 will now be able to make deductible contributions up to $50,000 a year as long as their account balance is lower than $500,000. It is not presently clear whether the $500K test applies at the time of making the contribution, or on the first day of the financial year in which the contribution is made, or whether the balance needs to be $500K or less once the contribution is made. This will be introduced from July 2012 as the current interim measure expires.

This measure will assist those who have not made adequate contributions in the past to “catch up”. It would however be helpful if the limit on the account balance was increased to $1M for the combined superannuation of a couple. This reflects that one partner may not be working and unable to increase their own superannuation under current rules.

Superannuation Guarantee

Whilst not recommended by the Henry Report, mandatory super will increase from 9% to 12%. Nothing will change for 3 years – in fact, we only get a 0.5% increase in the next 5 financial years. The delay for three years will allow employers to factor the increase into their wage negotiations, which recognises that employees indirectly pay for the SG themselves.

Minor super amendments

The Government will make a number of minor amendments to superannuation legislation, with intended effect from the 2010-11 income year. The amendments will include:

• The Government will retain the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual's eligible personal non-concessional superannuation contributions at $1,000. The rate was due to increase from 2012-13.
• Increasing the time-limit for deductible employer contributions made for former employees.
• Allowing the Commissioner of Taxation to exercise discretion for the purposes of excess contributions tax before an assessment is issued.